HEXPOL AB (publ)

Welcome to the HexBall Q2 presentation. During the questions and answers session, participants are able to ask questions by dialing pound key five on their telephone keypad. Now I will hand the conference over to the CEO Klaus Dahlberg and CFO Peter Rosen. Please go ahead.

Thank you, operator. Hello, everyone, and warm welcome to the HexBall Q2 presentation. And thank you for joining us today. We know a lot of companies are reporting today. So I will start with the business update and Peter will then take us through the financials. If you please turn to page four. Thank you. I will start by going through the Q2 performance. Despite the uncertainty in the world, our group has shown resilience. We are happy to report that Europe showed stable sales and that we had another quarter of growing sales within our second business era, engineered products. With that said, we saw a lower demand in the North American market affected by the high uncertainty related to the US trade policy. That is actually the main reason why we could not grow the overall sales and results compared to last year. In the quarter, we delivered sales of close to 5 billion SEK and an EBIT of 756 million SEK with a margin of 15.1%. The operating cash flow was on a good level, reaching 834 million. If we move on to demand and sales prices, Organic demand was down some versus Q2 last year in North America, and it was mainly affected by lower demand from automotive. But that was partly offset by growth in building and construction, the medical segment, and also within wiring cable. We saw a positive impact of Capcom contributing to the growth within the wiring cable segment. Capcom, as you know, that we acquired recently and was consolidated from the 1st of May. Sales prices were sequentially stable with no big variations in prices for major raw materials. There is continuously a high uncertainty and that is due to the US trade policy and the ever changing tariffs. If we please turn to page five, The total sales was lower than last year with a negative FX impact of 340 million SEK. Organic demand was slightly down versus Q2 last year, but as mentioned before, it was offset by growth in other product areas. We saw an increase in demand from building and construction, medical as well as wire and cable. The supply chain is sequentially stable and also stable versus last year. Lower operating margin was driven by the product mix and the OPEX in relation to lower sales. If we look at Hexpol engineered products, we are happy to report, as I said, a continued increase of sales compared to last year and a good development across all product areas, leading to an increase in EBIT. One driver is gaskets that has been growing in China, where, for instance, applications for IT cooling are driving demand for plate heat exchangers. And that's where these gaskets are being used for plate heat exchangers. We are firmly committed to sustainability and our focus continues both for our own operation, but also when it comes to our products. We still see a high interest in recycled products resulting in a high number of projects, not least from the automotive industry. And we feel we are quite well positioned there. M&A is an important focus area for our growth plans. We look positively at the M&A environment and we have the financial resources to make more acquisitions. Short term, however, there is a bit of a wait and see mentality among some of the companies we have on our hit list. The acquisition of Capcom is consolidated, as I mentioned, from the 1st of May, and we have already found areas for cooperation within the group. When it comes to the US trade policy, if you would please turn to page six, We followed the situation closely, but we didn't see any direct impact in the quarter. We saw an indirect impact in North America with lower demand, especially in the automotive segment. We expect to see minimal impact of the US tariffs in Europe. With that said, we expect to see some direct impact on HEXPOL in the US, primarily related to prices on raw materials. We expect the net effect to be minimal as we work to find alternative suppliers. Of course, we negotiate purchase prices and execute needed price increases in line with our business model. We also expect to see a negative indirect impact on demand in North America, but it's difficult to quantify that at this stage. If you please turn to page seven. I just wanted to mention that we are now shaping the organization to strengthen the product area, thermoplastic and TPE. And that we informed you about in the Q1 call. And there we want to capture the growth opportunities within this area. As you know, today, rubber compounding is by far the biggest segment. And we intend to grow TP and TP also. If you please turn to page eight. This picture you have seen many times, it's our business model and it's actually the backbone for our operations and it's an important foundation to remain resilient in an uncertain business environment that we see right now. If you please turn to page nine, it's time for the financial update and you Peter will start with the sales development for Q2.

Thank you, Klaus. If I can ask you to turn to page 10, we'll take a look at the sales development here in the second quarter. And as you know, we delivered sales of 5 billion SEK, which is down 8% compared to the same period last year. Organic sales are down 6% in the quarter, while the acquisitions of Piedmont and Capcom added about 4% in sales. Not surprisingly, there were large negative effects in the quarter related to the strong Swedish Corona, adding up to about 370 million SEC here in the quarter. If we take a look at the lower organic sales, they are mainly driven by lower sales in North America, while Europe and Asia showed stable sales in the quarter. And as Claus mentioned, from an end customer perspective, Automoto showed soft demand, which was partly offset by increased demand seen with building construction and wiring cable, where we saw higher sales. If I can ask you to turn to page 11, just looking at the financial overview for the quarter. EBIT of 756 million SEC with negative FX effects of about 50 million SEC included. The margin came in at 15.1%, which is below what we did same period last year. Main reason for this is somewhat less profitable mix and somewhat higher OPEX in relation to the lower sales. And we'll come back to this. Strong cash flow in the quarter, 834 million SEK, which is well above the EBIT for this quarter. So strong cash flow in the quarter. And if I can ask you to turn to page 12, taking a look at the numbers from a little bit different perspective. Sales at 5 billion SEK, operating profit at just below 760 million below last year. And at the same time, we saw an operating margin of 15.1%. And if we take a look at the drivers of this, I can ask you to turn to page 13. And looking at the drivers to see what impacts the lower EBIT, you will see that it's driven primarily by the lower sales. The gross margin is just below that of last year, and that's affected by the product mix. But at the same time, it's actually sequentially stronger compared to the first quarter this year. OPEX is about 30 million SEC above last year levels, and this is driven by the acquisitions of Piedmont and Capcom that have been added, but also that we have about 15 million SEC in one-time acquisition costs. And if we would exclude the one-time acquisition costs, EBIT in the period would have been about 770 million SEC. If I can ask you to turn to page 14, we'll take a look at the two business segments, starting with Compounding, where we saw sales of 4.6 billion SEC in the quarter, which is below the same period last year. Negative FX has a sizable negative impact of about 340 million SEC in the period. Recently acquired Capcom and Piedmont at just about 200 million second sales, while their organic sales are down. And as mentioned before, the lower organic sales are seen in North America, while Europe showed sales on the same level as last year. And as mentioned, from an end customer perspective, lower demand on sales is seen with automotive customers, power growth set by building and construction, wiring cable, but also some of the somewhat smaller segments such as medical. Operating profit at 681 million SEK with a margin of 14.8% here in the quarter. If I can ask you to turn to page 15, taking a look at engineer products. that despite negative effects of just below 30 million SEC, showed sales that were up 3% compared to last year, driven by strong performance of the gasket products. Operating profit also strong, came in at 75 million SEC, 12% above same period last year, with a very good EBIT margin of just below 19% for the quarter. And if we leave the profit and loss and take a look at the balance sheet and working capital on page 16, we continue to manage the working capital quite efficiently despite adding Piedmont and Capcom. Working capital is on the same level as last year, both in absolute terms and in relation to the sales. There's no change to the underlying payment terms when it comes to customers and suppliers. And if I can ask you to turn to page 17, taking a look at the cash flow. As mentioned before, we deliver a strong cash flow of 834 million SEK with smaller movements across the various items. And that translates into what we take a look at on page 18, looking at the net debt. This stands at 4.5 billion SEK. with a net debt-debit ratio of 1.27 at the end of Q2. This is higher than last year. And this is mainly driven by the acquisition of the minority share of ALMAC here in the second quarter, as well as the acquisition of Capcom also here in the second quarter. All in all, we continue to stand with a very strong financial position here at the end of second quarter. And with that, I hand over to Klaus to summarize the second quarter.

Thank you, Peter. If you would please turn to page 19. So if we summarize Q2, then we could see that Europe showed stable sales compared to last year. Engineered products showed growth. with a very good profitability we saw a lower demand in north america affected by high uncertainty related to u.s trade policy no real impact from tariffs in q2 and we are geared to handle the direct impact of imported raw materials to the us as i mentioned before Work is ongoing to build a strong organization to grow the thermoplastic and TB compounding product area. Capcom has been consolidated from the 1st of May, and we see wiring cable as a growing segment, not the least with the mega trend of electrification is pushing that. We continue to focus on M&A. We have a strong balance sheet allowing us to act. We continue to focus on sustainability with good progress, and we have saved the date for our capital market day in Stockholm on November 4th. And that's where we will share more of our growth plans and the strategy going forward. So by that, we conclude the presentation of the second quarter, and we open up for your questions.

If you wish to ask a question, please dial pound key 5 on your telephone keypad. To enter the queue, if you wish to withdraw your question, please dial pound key 6 on your telephone keypad. Next question comes from Gustav Berneblad from Nordia. Please go ahead.

Thank you very much. It's Gustav here from Nordia. I thought maybe to start off here on sort of the cost side and the weaker demand that we are seeing and it doesn't really sound like we're seeing any change here but given sort of the market uncertainty would you potentially consider to take out more costs here or is that too short term of a thinking for you?

I think, Gustav, Peter, short term, we will adjust the production planning and the manning in production. If this remains, we will review our manufacturing footprint in the long run. But here in the short term, it's primarily the production planning that we will look at.

That's very clear. Thanks. And then also, I mean, if we look at the competition, a lot of non-public ones for sure, but it might be also hard for you to comment on. But do you have an interpretation of sort of how they are performing in this market environment? And also, have you seen any bankruptcies in the market? Or if you can just comment on the competitive landscape, it would be interesting to hear.

Well, Claes here. Hello, Gustav. So when it comes to the competition, when we look at both US and Europe, our firm conviction is that we are not losing market share at this stage. So it's the overall market that has dropped. And then I think we're mainly in Europe where we have some smaller players that maybe have some trouble in this environment but i couldn't state if anyone went bankrupt or so but maybe they are suffering more than we are since we are the market leader in both north america and europe yeah that's very clear uh thank you and just sorry the last one very quick one if you can just comment on the the pricing impact here on the organic growth uh in the quarter

If we look at the lower organic sales development, it's primarily volume. Prices are on the same level as last year and also sequentially. There is also on the sales side a little bit of a mix effect. with a little bit less profitable mix we also see that the average price goes down but to summarize if we look at organic sales development primarily volume and a little bit of a mix effect also on the sales but stable sales prices product by product that's perfect very clear thank you very much that was all for me and have a nice summer thank you

The next question comes from Henrik Hintz from ABG Sundahl Collier. Please go ahead.

Hi, this is Henrik Hintz at ABG. So you said that you look positively at the environment for acquisitions, but that in the short term you see a wait-and-see attitude among certain companies. What is it then that gives you the overall positive view despite this?

Hello, Henrik, this is Klaas here. So the positive, we see it positive when we look at our total pipeline and let's say the possible acquisition targets we have. But as you say, short term with the uncertainty, let's say there we see a bit of a wait and see more. But again, that's more short term. not for the long-term perspective, there we are very positive. All right.

So if this short-term hesitancy would disappear, you think you have a good pipeline, and how far would you be willing to stretch the balance sheet in conjunction with M&A if you had the opportunity?

But short term, as you say, if that would disappear, we have a good pipeline of possible acquisitions, let's say. And how far we would be willing to stretch the balance sheet? Well, we are, as I said, in a good position today to actually do the acquisitions with the current status also.

All right, a final one from me maybe. So you mentioned that sales prices were sequentially stable. I'm just wondering, could you clarify a bit how come you have no price effects from tariffs in the quarter, and will we see that coming up?

Very simple price increases to compensate tariffs were done at the end of this quarter. And with that being said, we talked about small changes, the direct impact from tariffs has been quite limited. So one wouldn't expect to see that to come through on the price level if we look at it from a global total company perspective.

Yeah, okay. Thank you. That's all from me.

Thank you. Next question comes from Carl Dagenberg from DNB Carnegie. Please go ahead.

Thank you very much. So just one question from me. I have on, let's say, the organic development in compounding per se. I just wanted to ask you about your own reflections, because when I look at the SMT light physical production numbers for Europe and in the US, here for Q2, I think they've been indicating a decline of roughly, yeah, let's say two to three and a half percent, depending on the geography. And looking at your organic development also, considering that pricing has been fairly stable, it's a little bit of a discrepancy also Considering that you have a couple of other segments that have actually been growing, it sounds like. So any thoughts on that? Why? Because I guess you have quite good correlation with these numbers historically.

A couple of things. We look at production volumes and the S&P data that we see for this quarter and also previous quarter show drops in production in the range of 5% to 7%, depending on whether it's in Europe and the US. So that's one part. The other part is that there is always a certain timeline between the production statistics sell to the tier ones who in their turn sell to to the oms so there is a certain timeline between production data for vehicles and weeds sold through the the value chain okay and then i wanted to also secondly ask just on let's say monthly

momentum throughout the quarter and then I guess maybe uncertainty was the highest towards the beginning and now I guess you know tariffs and so forth that's maybe eased a little bit so would you say that let's say certainty in production around your customers has that become a little bit better towards the end of the quarter or is the monthly momentum fairly even on a monthly basis throughout Q2?

Well, Carl, I think there is still, as we stated also, there is still an uncertainty among our customers. And as you know, we supply to tier ones and they supply to the OEMs. And maybe also somewhat connected to what type of, let's say, new platforms. could be selected for a certain new range but they tend to postpone in the current environment if you understand me yeah yeah okay um i think that was everything from my side so uh thank you very much and uh enjoy the summer thank you same to you

Next question comes from Johan Dahl from Danske Bank. Please go ahead.

Good morning, everyone. Just a question on the product mix, which you addressed briefly, Peter. I was just thinking, is there anything incrementally new here in the second quarter with regards to the product mix? I mean, we've been talking in the past about the U.S. being weak, automotive being weak, sort of headwinds on mix. But is there anything else to be added there, which you've learned here in the second quarter?

Simple answer, no. So if we look at sequentially, product mix, mix, geography, et cetera, is very, very similar to what we saw in Q1.

And just for reference, can you remind us how the comps developed there as you go further into 2025? Will that headwind sort of ease off here or do you expect it to be similar throughout the year?

I think if we move into Q3 and Q4 comparables, the mix would become more similar to where we are today.

Can you see anything regarding, I mean, you've been speaking positively, you know, wire and cable, construction, a bit on MedTech side, but if you look on your sort of the engineering, transportation, possibly consumer side, any comments there with regards to end user demand?

I think when it comes to if we talk about, for example, general industry, there is still uncertainty, especially in North America, Europe more stable. And the same goes for several of the smaller segments, too. Well, we see growth in medical, for example.

I guess those, I mean, if you look on engineering, et cetera, but they were still better than the group average, I would think, in the quarter, or was it a sort of a headwind? Yes. All right. Just a final question on raw material prices. You talked about tariff-induced price hikes. We've seen a bit higher sort of Brent crude, et cetera. In Hexful, are you planning for this sort of extended period of price deflation to sort of swing around here in the second half? Do you have any sort of view on that topic?

Hello, Johan. Claes here. So when it comes to Brent, we recently went through that. It's about $70 a barrel now. But as we stated, there has not been a big change, actually. So that oil price does not go through, how do you say, affect directly the feedstock we are buying. But we don't see any big changes going forward, despite what has happened also in the Middle East, I should say, but that has not affected us yet. And you know also our business model that we would not be sitting on, if there is a major price increase, we would pass that on to our customers. That's the setup we have with them.

Very clear. Thanks so much.

As a reminder, if you wish to ask a question, please dial pound key 5 on your telephone keypad. There are no more questions at this time, so I hand the conference back to the speakers for any closing comments.

so i just want to say again thank you for joining us today and we wish you all a great and well deserved summer vacation whenever that time comes all the best thank you